The OECD has taken stock of cross border tax issues that are likely to arise due to the current pandemic and has provided its guidance on how to best deal with those issues considering international tax treaty principles. We also investigate the UK’s statutory residence test (‘SRT’) which has been used to determine whether an individual is tax resident in the UK.
OECD GUIDELINES
Issue |
Guidance |
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Creation of Permanent Establishment |
Enterprises may be concerned that their employees working remotely from other countries may create a “permanent establishment” in those jurisdictions and therefore creating tax obligations in those countries.
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Place of Effective Management
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Enterprises may find that their senior executives or directors are unable to travel and that this inability to travel may impact their tax residence.
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Cross border workers
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States are concerned about their taxing rights over employment income where employees are working from their state of residence, which is different from the place where they used to perform their employment.
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Residence status of individuals
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The residence status of individuals might change where they get temporarily stranded in a host country or where they temporarily return to their previous home country.
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Statutory Residence Test
The SRT takes into account various factors but focuses heavily on the number of days an individual can spend in the UK. Broadly, an individual spending fewer than 16 days in the UK in the tax year (6 April to 5 April) or 46 days if not UK resident in one of the preceding three tax years, will be conclusively non-UK tax resident. If the threshold of 183 days in the UK is reached in the tax year, the individual will be conclusively UK resident. Between those ends of the spectrum, an individual’s ‘UK Ties’ will determine how many days he may be present in the UK (being a number less than 183) before he/she is treated as UK tax resident.
COVID 19 – EXCEPTIONAL CIRCUMSTANCES
As a rule, the recommendation would be that an individual who needs to manage the number of days spent in the UK works out the number of days they can spend in the UK before becoming UK tax resident and then excludes at least 14 days from this total for unexpected visits to the UK for family, business or health reasons. However, the travel restrictions imposed as a result of Covid-19 and the varied approach taken by different jurisdictions, may mean that this safety margin of 14 days is insufficient.
The SRT provides a statutory relief which may be used to exclude from an individual’s UK day-count any day as a result of ‘exceptional circumstances beyond the control of the individual which prevents him from leaving the UK.’ The number of ‘exceptional’ days is limited to 60 days in the tax year.
On 19 March 2020, HM Revenue and Customs (“HMRC”) confirmed that if an individual were to find themselves in the following circumstances due to Covid-19, it will be considered ‘exceptional’ for the purposes of obtaining the relief.
- Quarantine or advice by a health professional or public health guidance to self-isolate in the UK as a result of the virus
- Receipt of official Government advice not to travel from the UK as a result of the virus
- Inability to leave the UK as a result of the closure of international borders, or
- A request is made by the individual’s employer for his temporary return to the UK as a result of the virus.
It should be noted that the HMRC will consider cases individually, which ultimately means that the position for taxpayers is uncertain and taxpayers should seek the appropriate tax advice.
The following scenarios are most likely to create problem areas;
Working whilst delayed in the UK |
Individuals working whilst marooned or quarantined in the UK could face increased risk of inadvertently becoming UK tax resident in a number of different ways. |
Only home is in the UK
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There is also a risk that an individual will become automatically UK resident if there is a 90 day period where he only has a UK home and does not spend 30 days in his overseas home in the tax year. |
Overseas employer – employee is marooned or quarantined in the UK
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Remittance basis users
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It is likely that remittance basis users who rely on their UK source income to fund their lifestyle in the UK will be hit by the financial issues linked to Covid-19. |
IMPORTANT
We do not offer taxation or legal advice and do not hold ourselves out to be tax experts or advisors in Mauritius or anywhere else. Independent legal and tax advice should be sought.